The Cincinnati property market is one of the hottest in the country. That is great for investors and property owners, but it also translates to increased competition.
This impacts things like the ability to determine property values. That is vital for calculating appropriate rent levels or selling a property.
Below is an expert guide to commercial property valuation. Keep reading to find out how to make the best decisions regarding your investment property.
What Impacts Commercial Property Values?
The first step is to look at the factors affecting commercial property valuation. Here are the main ones to consider.
Comparable Properties
The "perceived" value of comparable properties in the area, or "comps," will impact property valuation. Regardless of what anyone else thinks a commercial real estate value should be when a property sells, that sale price impacts the value of similar properties.
Cap Rate
Next, the capitalization rate is the return an investor can expect from a property. It is calculated by dividing net operating income by the current value of the property.
The cap rate reflects the market's perceived risk for the property. A lower risk means a higher likelihood that a buyer would pay more for it. Higher risk means an investor will pay less to acquire the same property.
Market Conditions
Market conditions are a huge influence on property valuation. Like any other product, markets with limited supply and strong demand will see rent levels (and property values) rise.
Property Features
Finally, the unique features of your property will heavily influence valuation. Is the property in an area with lots of foot traffic or has layouts conducive to certain business practices? If so, then the value of that property will be more than the same size building that lacks such attributes.
Strategies for Commercial Property Valuation
There are several property valuation methods. Here are the primary ones to look at.
Cost Approach
The cost approach is a basic method of doing property valuation. It assumes a rational buyer would not pay more for a property than it would cost to build a similar building from the ground up, including land value.
Income Approach
The income or "direct" capitalization approach is the most commonly used commercial valuation method. To find this, take the net operating income and divide by the property's capitalization rate.
While this method is useful, it also can be tricky, since many factors can impact the capitalization rate. Look closely at these factors--including occupancy levels and market conditions--to get the most accurate value.
GRM Approach
The 'gross rent multiplier" (GRM) is a metric used to calculate property value based on the amount of income it produces. It takes the sales price of comparable properties and divides it by annual gross rents. That value is then multiplied by the gross income of the property.
Get More Property Valuation Tips
Now that you understand the basics of commercial property valuation, you can make more informed decisions regarding rentals. An experienced property management company can further advise you on how to get the most out of your real estate investment.
PMI Gatekeeper Realty Services is a comprehensive property management company. We offer a range of residential and commercial real estate services, including property valuation and appraisal services, in the Cincinnati area. Reach out to us today to learn more.
